Clients are asking about the deductibility of home mortgage interest and equity lines under the Tax Cuts and Jobs Act that takes effect in January 2018.
Under the former rules, you could deduct interest on up to a total of $1 million of mortgage debt used to acquire your principal residence and a second home. Qualifying home equity debt (HELOC) was limited to the lesser of $100,00 or the taxpayer’s equity in the home.
The New Tax Law states you can deduct interest on a mortgage of up to a total $750,000. However, for acquisition debt incurred before December 15, 2017, the higher pre-Act limit applies. The higher pre-Act limit also applies to debt arising from refinancing pre December 15, 2017 to the extent the debt from the refinance does not exceed the original debt amount. This means you can refinance up to $1 million of pre-December 15, 2017 acquisition debt in the future and not be subject to the reduction limitation as long as the refinance does not exceed the original debt.
And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt. This applies regardless of when the home equity debt was incurred. Accordingly, if you are considering incurring home equity debt in the future, you should take into consideration that the interest you pay is not deductible.
Both of these changes last for eight years, through 2025. In 2026, the pre-Act rules are scheduled to come back into effect unless Congress extends the Law.